RBNZ leaves OCR in neutral

The Reserve Bank has left the Official Cash Rate (OCR) on hold at 1.75 percent as expected. Photo: Lynn Grieveson

The Reserve Bank has left the Official Cash Rate (OCR) on hold at 1.75 percent as universally expected, and has left its outlook for interest rates in neutral.

"Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly," Governor Graeme Wheeler said in the key final paragraph of his statement.

This outlook paragraph was unchanged from the previous full Monetary Policy Statement (MPS) on May 11 when the Reserve Bank saw the OCR on hold until early 2019. Today's decision was just the usual nine paragraph statement for a decision between full quarterly Monetary Policy Statements. The next full MPS is on August 10.

The main changes between May and today were around the surprisingly weak GDP figures for the March quarter released on June 15 and the currency's three percent rise since May.

Wheeler's comment on the currency was relatively subdued, which saw the New Zealand dollar edge up to 72.5 USc from 72.2 USc shortly before the release of the decision. Currency traders had expected somewhat tougher language about the need for the currency to fall.

"A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector," Wheeler said.

He again noted the moderation of house price inflation in Auckland in particular because of last year's new 40 percent deposit requirement for landlords and slightly higher mortgage rates.

"This moderation is projected to continue, although there is a risk of resurgence given the on-going imbalance between supply and demand."

The other slight change since May was Wheeler's comment that the Budget's announcements, which Treasury measured as a slight loosening of fiscal policy, "should support the outlook for growth."

Wheeler characterised the recent rise in headline inflation as temporary and said gradual increases in wage and non-tradables inflation would bring inflation back to the middle of the Reserve Bank's one to three percent target band over the medium term. His language was identical to his May statement.

Economists were unsurprised by the neutral tone to the statement, but most still see the Reserve Bank tightening from midway through next year, rather than the early 2019 target date in the Reserve Bank's most recent forecasts.

The Australian-owned banks are also talking about continuing to nudge their mortgage rates higher due to funding and capital pressures, although the smaller banks, which rely more on local term deposits, are growing lending quickly and keeping their rates low. This slowing of lending growth by the big four banks is effectively tightening monetary conditions slightly.

"We still hold the view that the RBNZ will likely tighten next year, given our belief that the economy will grow at a rate that will gradually eat into capacity," said ANZ's Cameron Bagrie.

"However, the RBNZ is some way away from embracing that mind-set. It will not react until it sees broad-based inflation," he said.

Westpac's Michael Gordon said he saw the Reserve Bank on hold all through 2017 and 2018.

"The RBNZ needs to keep rates low to ensure sustained strength in domestic activity and a rise in underlying inflation pressures back to levels of around 2 percent," he said.

ASB's Nick Tuffley said he expected the OCR to remain on hold until late 2018. He also noted the Reserve Bank's tamer-than-expected language on the New Zealand dollar.

"While the RBNZ’s language around the higher NZD remained factual and similar in tone to previous statements, some market participants may have been looking for a stronger attempt to talk the currency down," he said.

Overall, the Reserve Bank's neutral stance reflects the various offsetting forces seen since its May statement.

Fiscal policy has eased somewhat in Budget 2017 and the economy is still rumbling along with a growth rate of around three percent. However, the currency's rise and the tightening of lending conditions along with slightly higher mortgage rates from the big banks have effectively tightened conditions. The net result was neutral from a Reserve Bank point of view.